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Author: kltrader   |   Latest post: Thu, 21 Mar 2019, 9:23 AM

 

What Should the New Khazanah Management Prioritise?

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Macquarie Equities Research (MQ Research) published another report yesterday on Malaysian sovereign wealth fund Khazanah Nasional (Khazanah), giving suggestions for priorities for the new Khazanah management team. Despite fiscal pressures, MQ Research believes that the new board should focus on value enhancement before contemplating stake sales. MQ Research’s top picks for government linked companies (GLC) include Tenaga Nasional (TNB), Telekom and CIMB.

Event

  • Extrapolating MQ Research’s recent report, Khazanah’s new management should prioritise relatively straightforward yet significantly value-creative regulatory clarifications / reorganisations as MQ Research articulates below for Tenaga, MAHB and Telekom. These initiatives leave the B40 income segment unscathed (i.e. TNB’s Lifeline Band covers c.50% of households, MAHB’s passenger service charge (PSC) hike is only for ex-domestic) while incentivising stimulative, high-value capex (i.e. re broadband rollout, airline terminals).

Impact

  • Tenaga – catalyst = improving visibility: sentiment-boosting tariff adjustments should be followed by separating ring-fenced entities including Single Buyer Generation.
  • This further reduces regulatory risk perception via implicit official endorsement of IBR (Incentive Based Regulation) and allows higher payouts per free cash flow (FCF) to equity of >10%. Base case target price (TP) is RM18.54 (15x 19E); bull case is RM20.50 (17x).
  • MAHB – catalyst = Risk Asset-Based (RAB) framework. As articulated by travel/logistics analyst, the pending RAB should be expedited to allow MAHB to earn cost of capital (MQ Research currently estimates sub-weighted average cost of capital return on invested capital (WACC ROIC)  until FY23) which will then allow greater investment in its terminals. A 20% or RM7 hike in PSC achieves this while leaving the PSC at a discount to regional airports. Bull case TP via RAB (7% return on RM8bn asset base) is RM11.42.
  • Telekom – catalyst = a breakup: MQ Research notes accessing Tenaga’s fibre infrastructure to grow broadband penetration will still require significant investments; instead, MQ Research suggests splitting Telekom into a regulated asset company (AssetCo) and a service company (ServiceCo); the former to house the infra that all telcos can access (i.e. expediting rollout), the latter to be merged with an existing mobile player. Estimated combined AssetCo + ServiceCo valuation is RM5.71.
  • IHH – catalyst = reigned in ambitions: underscored by an 11% share price decline since MQ Research’s downgrade recently, IHH’s sprawling operating footprint is becoming a liability, especially regarding Turkey/India. Management refocus on profitability/Asia would be positive.

Outlook

In terms of Khazanah-GLCs, MQ Research’s favourites are Tenaga, Telekom, Axiata, CIMB; re Petronas entities, MQ Research likes PChem, PetDag. Sector-wise, MQ Research favours banks, transport/logistics, exporters, mid-cap construction and consumer.

Source: Macquarie Research - 14 Aug 2018

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Labels: TENAGA, AIRPORT, TM, IHH

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